Top mutual fund managers aren't finding much to like these days in a stock market that's now about where it started in January.
In many instances, they're looking in surprising places for investments they hope can grind out some gains. Increasingly it's more difficult to find opportunities because they're having a tough time predicting what's next for the economy.
One big worry: Whether the market will go south again as the government removes stimulus programs, the homebuyer tax credit and other rescue measures.
"Right now the economy is so jacked up on drugs that you just don't know what's going on," says Steve Romick of the FPA Crescent Fund (FPACX).
Romick, who expects "muddled" economic growth, is a respected voice because of his top record at his $3.4 billion fund, which has broad leeway to invest globally, including in both stocks and bonds. Its average annual return over the past decade was 10.7 percent, versus a 1 percent loss for the Standard & Poor's 500 index.
Among his current favored investments are foreign oil stocks that investors blacklisted following the BP spill in the Gulf of Mexico. Another top manager likes stocks of European industrial companies recently hammered by the continent's debt troubles.
And Romick is even considering how average folks might invest in U.S. farmland. He sees a real estate opportunity capitalizing on a growing global population demanding more food and a meatier diet.
The alternative thinking emerged at this week's Morningstar investment conference, where nearly 1,400 fund industry pros and financial advisers have gathered to talk shop. The annual event also drew 160 exhibitors. They face a tough job pitching investment products now that stocks are down nearly 12 percent over the past two months, canceling out gains early in the year.
A look at some of the unexpected places where managers are investing:
BLACK GOLD: Two of the top six recent holdings at FPA Crescent are overseas oil stocks: British offshore drilling company Ensco and French oil supplier Total.
Romick has a contrarian take on a sector hit broadly by the fallout from the two-month-old BP spill. A broad index, the NYSE Arca Oil, is down 19 percent over that stretch, and shares of BP itself on Thursday dropped to levels not seen in 14 years.
Even with the global economy hurting, Romick figures oil demand will hold up long-term while supplies tighten. Oil is becoming increasingly difficult to get out of the ground — witness the deep-sea drilling debacle in the Gulf.
"It doesn't bubble up out of the ground quite as quickly as it used to, though the current Gulf disaster makes it seem otherwise," he says.
That should lift oil prices and stocks, he says.
THE OLD CONTINENT: Philippe Brugere-Trelat, co-manager of the top-performing Franklin Mutual Global Discovery Fund (TEDIX), likes European industrial stocks.
They've been hit recently along with virtually all European stocks by the debt crisis in Greece and some of its neighbors. The fears recently sent the euro to a four-year low against the dollar.
Brugere-Trelat notes industrial firms that export to the U.S. and other markets could benefit from the weak euro, which makes European cars and other exports more affordable to foreign buyers. Increased exports could offset the blow from weaker sales on the continent.
"A weak euro is a godsend for European industrial companies," Brugere-Trelat says. Their stocks "are unusually attractive now, and have been tarnished for the wrong reasons."
One of his current favorites: Danish container shipping and oil group A.P. Moller-Maersk.
FERTILE FIELDS: Romick is feeling a strong pull from America's agricultural heartland. A friend, he says, bought a few hundred acres of farm land in North Dakota, and came away with a 5 percent annual return.
There's no easy way for most of us to invest in farmland. But Romick says his fund company is working with consultants to identify opportunities. Imagine, for example, farm-property real estate investment trusts, similar to REITs offering small timers a chance to invest in commercial real estate and get reliable payouts.
The investment thesis: Romick expects the U.S. dollar will weaken long-term. That would make U.S. agricultural exports more affordable, boost demand for U.S. crops, and make farmland more valuable.
He also points to positive supply and-demand trends. Global population growth is nearly 1 percent a year, although farm acreage growth is just 0.3 percent.
"The difference has to be made up by higher productivity," Romick says. "And you have people in emerging markets who are eating better. When you eat better, you have to run the farmland harder."
Farmland, Romick says, is a "terrific place" to invest.
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